Significant reductions in promised rail investment for the north of England make little sense economically, and damage the government politically. But essentially, rail investment in the north has fallen victim to petty Whitehall power struggles, led by the Treasury. After noisily insisting his priorities are “levelling up” and reaching net zero emissions, Boris Johnson is overseeing planned investment that, in the words of Andy Bagnall of the Rail Delivery Group, will “inevitably hold back the ability for railways to power the levelling-up agenda and the drive to net zero”. The loss of the HS2 extension to Leeds is a huge blow to the Yorkshire economy, depriving the county of substantial new rail capacity. Reducing the long-promised and much-needed Northern Powerhouse Rail from new rail construction to upgrades on existing lines means losing a potentially transformational transport investment. Anger across the north of England, not least in so-called “red wall” seats, is understandable. None of this was necessary. The planned investments are still substantial, with £96bn earmarked for rail projects across the country. But the amounts saved by scaling back Northern rail investments are small by comparison, totalling only £14bn. With government borrowing costs still close to the lowest they have ever been, there was no economic need for this relative penny-pinching. Disguised by the technicalities of public finance, however, there is a battle taking place over the government’s economic direction. It is clear from insider accounts that the integrated rail review “became a battleground to control spending by Rishi Sunak’s Treasury”. After a relatively generous spending review in October, with £150bn in increased spending over the next three years, there is now a pushback by fiscal hawks from that department. The Treasury’s primary weapon is a detail in the government’s “fiscal rules”. Fiscal rules are the set of targets that a government might choose to set itself for its tax and spending plans, typically focusing on its levels of planned borrowing and the level of future government debt. Formal rules were first introduced by Gordon Brown, then Labour chancellor, in 1997, and they were abandoned only as the global financial crisis erupted in 2008. But it was under the Conservative-led coalition government, formed in 2010 with George Osborne as chancellor, that the government’s fiscal rules were first used to reinforce a radical programme of spending cuts. By setting dramatically tight targets for reducing the government deficit – the gap between what it spends and what it receives in taxes – fiscal rules were a useful mechanism for the Treasury to argue for strict spending cuts for government departments. Austerity, as is now clear, did not work as he intended: while a huge amount of pain and misery was inflicted on the most vulnerable in particular, the weakening of the whole economy through spending cuts meant that Osborne consistently missed his own targets for the debt and the deficit. Sixteen different fiscal targets were announced over the decade, as growth consistently came in lower than forecast. By the time Boris Johnson became prime minister in summer 2019, austerity was deeply unpopular – not least in the Tories’ “red wall” target seats – and Johnson noisily committed to ending it, even claiming he had always been a secret opponent of spending cuts. His two chancellors, first Sajid Javid and now Rishi Sunak, have obliged, bringing in real terms spending increases in addition to the exceptional spending of the Covid-19 pandemic. They have updated the fiscal rules to match the new policy, introducing targets for the debt and the deficit that are strikingly close to those proposed by John McDonnell, then shadow chancellor, in early 2016 – but for some crucial details. Neither Sunak nor the Treasury are fans of public spending, but (perhaps until rather recently) this is very much Boris Johnson’s government, and the prime minister places winning the next election above either Sunak’s ideological preferences or the Treasury’s institutional biases towards spending cuts. The real terms increases in government spending since 2019 reflect Johnson’s power. Briefings against him showed the Treasury’s unhappiness. Better-than-expected growth forecasts allowed Sunak to spend more without borrowing much more at the spending review, temporarily defusing the row. However, the Northern rail farce shows it has not gone away. The Treasury has a longstanding institutional bias against investment in the north of England, as recent research has shown, systematically spending less there and across the country outside London and the south-east. The Tories, copying Labour, even promised to “rewrite the rules” of the department to remove the bias. However, details in the integrated rail plan show the old anti-north bias still at work – £1bn is earmarked for a tunnel in the Chiltern Hills, but similar amounts could not be found to provide Bradford with a high-speed connection. The instrument the north is suffering under is a crucial detail in the fiscal rule, which sets a 3% of GDP limit on government investment. After decades of underinvestment, this figure is clearly too low – only slightly above government investment today of 2.7% of GDP. Meeting net zero alone will, on estimates by the Institute for Public Policy Research, cost £33bn a year, or about 1.5% of GDP. There is no real economic justification for the 3% limit and none has been offered in public. But it does mean that the Treasury – opposed to investment spending, biased against the north, led by a chancellor predisposed to lower spending – can assert itself against demands for greater spending and borrowing elsewhere in government. It’s an economic loss for the north of England that may yet prove politically fatal for the prime minister. Immediately scrapping the 3% limit would at least help prevent future economic damage. James Meadway is director of the Progressive Economy Forum